UPDATE 2-Record May deficit highlights Brazil's budget challenge

BRASILIA, June 29 (Reuters) - Brazil posted on Wednesday its
largest ever primary budget deficit for the month of May,
highlighting the challenges the government faces to close a
massive fiscal shortfall amid the worst recession for decades.

The primary deficit of 18.125 billion reais
($5.57 billion) in May topped market expectations for a gap of
17.3 billion reais.

It followed a surplus of 10.182 billion reais in April.

The primary balance, which excludes debt payments, is a key
gauge of a country's capacity to repay its borrowing. The
overall deficit, which includes interest costs, rose to 60.623
billion reais in May.

Acting Planning Minister Dyogo de Oliveira said on Wednesday
that the government expects a smaller primary deficit somewhere
above 100 billion reais in 2017.

The forecast will be revealed next week amid lingering
doubts about the government's commitment to close a fiscal gap
that cost the country its investment grade rating last year.

Michel Temer, who as vice president replaced President Dilma
Rousseff during her impeachment trial in the Senate, is
proposing capping public spending to limit this year's deficit,
which is expected to swell to a record 163.9 billion.
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